Crude oil prices have a huge impact on global oil price. The price of crude oil is impacted by two important factors:
- Geopolitical development
- Economic events
Few example to quote the impact of geopolitical developments on crude oil price we have the 1980 Iran-Iraq war and the 1990 gulf war which influenced the oil prices; on the economic front we have instances like the global financial crisis of 2008 – 09, and the current oil oversupply from OPEC are the major events that have significantly affected the oil prices.
This brings us to another term OPEC, for those who are new to the world economy, let me tell you that OPEC or Organization of the Petroleum Exporting Countries is a global form consisting of nations that directs or influence the oil prices as they are some of the highest oil producing and exporting nation, with Saudi Arabia sharing the maximum share of the pie.
The contributing nations making OPEC:
OPEC was founded in 1960. Initially it had Iran, Iraq, Saudi Arabia, Kuwait and Venezuela. Later nations like Qatar in 1961, Indonesia in 1962, Libya in 1962, UAE in 1967, Algeria in 1969, Nigeria in 1971, Ecuador in 1973, Gabon in 1975 and Angola joined OPEC in 2007 respectively.
OPEC nations contribute 40% of the global crude oil and its oil export contributes to 60% of the total petroleum traded globally. Because of such a massive chunk in the global oil production and export, these nations have the power to influence and direct the price of the oil. For example, the recent oversupply of oil from Saudi Arabia has reduced the oil prices to rock bottom which is lowest in the past 12 years.
Why OPEC have such a strong impact?
There are many reasons accountable for making OPEC nations hold the supreme power to control the global oil prices:
- There is no alternative, the non-OPEC nations do contribute to oil production but there share is minimal in comparison to the OPEC nations and thus they have the monopoly in the global market.
- Lack of economically feasible alternative to crude oil
OPEC has the economic competence to influence the oil prices and the instance when in 1973 Arab oil embargo saw prices augmenting from $3 to $12 per barrel. The current phase where oversupply has to the downfall of price from $100 a barrel to $28 per barrel.
Conclusion:
The dynamics of oil economy is complex and the price determination for oil goes being the horizon of demand and supply. Oil has played a crucial role in the political world, with much emphasis being laid on oil as there are no alternatives to this source of energy and more and more nation being defined on oil to run its infrastructure and development, they continue to play and important political role. Although the non-OPEC nations are making an effort to increase the oil production but the dominant position of OPEC nations stands unrivalled.
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